Markets

China's Economy Is So Bad Even the Rating Agencies Are Telling the Truth

By Constantine von Hoffman

Updated on: July 21, 2011 / 6:17 PM EDT / MoneyWatch

Things are so bad in China even the ratings agencies are telling the truth. Separate reports from Fitch and Moody's point to the likely fraud and accounting irregularities at Chinese companies.

The reports underline the already dubious reputation of China's business practices. Fitch specifically says the companies suffer from "the overall Chinese framework of an under-developed legal system and documentation standards, distinct business practices and weak corporate governance." Translated from expert to human that means: "Enron looks good by comparison."

Fitch generally rates Chinese corporates at "BB" and below while it puts state-owned and state-supported companies at investment grade and up. Which you've got to figure means they are even worse. These are the agencies which were giving AAA ratings to credit default obligations after Bear Stearns became road kill.

All this fraud comes on top of economic conditions every bit as sturdy as a marshmallow dropped in a campfire. Consider that China's billions of dollars in local debt is backed by collateral that is overvalued, may be hard to sell and, in some cases, doesn't exist. (Sound familiar?) Bloomberg points to a 30,000 seat sports complex being built in one city.

Loudi, home to 4 million people in Chairman Mao Zedong's home province of Hunan, is paying for the project with 1.2 billion yuan ($185 million) in bonds, guaranteed by land valued at $1.5 million an acre. That's about the same as prices in Winnetka, a Chicago suburb that is one of the richest U.S. towns, where the average household earns more than $250,000 a year. In Loudi, people take home $2,323 annually.

DANGER, WILL ROBINSON! DANGER, WILL ROBINSON!

If you think it's too late when ratings agencies take notice, what does it mean when the Communists do? Last week Beijing started taking action to slow down real estate prices around the nation. The government has ordered increases in down payments and limited home purchases after developers posted gains in first-half sales and housing transactions climbed 31 percent last month. New home prices rose by 2.2 percent in Beijing and Shanghai last month.

In its quest to act just like the U.S. and Europe, the Chinese are trying the same sorts of placebos that served Washington and the EU so well. Shanghai Daily reports the nation's "housing authority has launched investigations into excessive housing price rises in second- and third-tier cities." They are even trying to get cities to meet targets for building affordable housing. That is so cute! Just one suggestion. Call them "blue ribbon panels" like we do.
Let's not forget about inflation, which is also rising on helium-filled wings. June's consumer price index was up 6.4 percent in the last 12 months. Especially impressive when you consider it was 5.5 percent in May. If there's a saving grace in all this its that these numbers were reported by China's National Bureau of Statistics, which probably has the same devotion to strict standards seen in the rest of the economy.

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